State treasurers have reportedly warned that Kevin Rudd's health reform plan will provide a precedent for the federal government to raid their GST revenue for future policy reforms in areas of state responsibility.

There is of course the question of credibility, one that the State Premiers would mostly prefer not to ask, for the obvious reason. This is a question increasingly being asked by sensible commentators.

The best compilation of the Rudd government's waste and mismanagement Henry has seen is by Andrew Bolt in yesterday's Herald Sun.

Waste and mismanagement is inflationary, as it boosts demand more than supply.This applies especially to Australia’s spending on ceiling batts and school refurbishment. Glenn Stevens has declined to criticise the Rudd government's fiscal stimulus, and is unlikely to do so as he can claim to be apolitical.

It seems that the Reserve Bank's run of interest rate rises has done little to dent consumer confidence, which is not far short of the peak level reached before the global financial crisis.

The survey of consumer sentiment by the Melbourne Institute and Westpac found only a 1 per cent dip in confidence in the past month, despite last week's increase in the official cash rate to 4.25 per cent, which the banks immediately added on to mortgage rates.

"This is a surprisingly strong result," Westpac chief economist Bill Evans said, noting that from 2003 to 2007, increases in official interest rates were followed by much larger falls in consumer confidence of between 5 and 15 per cent

Why people, even competent economists, keep being surprised by stronger than expected growth is a mystery that flies in theface of the facts.

'The most persistent tendency has been to underestimate the strength of demand in the Australian economy. The process of structural reform on which the government is now embarked is likely to intensify this tendency. The problem of how to cope with it needs more attention from the Bank, the Government and outside commentators.

'My conjecture is that the Australian economy is likely to show a continued tendency to grow too strongly for comfort. Fiscal policy is now in good shape and there are reasonable prospects of continued wage restraint. Reform of the tax system, improvements to work practices and the orderly reduction of protectionism is likely to give a further impetus to growth. Of course commodity prices will again turn down, there could be outbreaks of old-fashioned industrial strife, and so on. If adverse developments were sufficiently important to risk serious recession in the Australian economy then monetary policy might need to be eased. But in the circumstances most likely to be facing Australia the main question for monetary policy is likely to be the appropriate degree of firmness'.

The Asian 'Tiger' economies have an even greater tendency to achieve stronger than expected growth.

'Singapore's trade-dominated economy grew 32 % in the first quarter on a seasonally adjusted annual basis, boosted by a 139 % jump in manufacturing, much of it electronic goods destined for the U.S. and China. While GDP data from this city-state's relatively small economy are volatile, both figures were the fastest rates of growth since the data series began in 1975'.

"This is not only a Singapore story," said Endre Pedersen, Executive Director of Fixed Income at MFC Global Investment Management. "It's an affirmation of Asia's strength compared with the rest of the world."

Inflation is the inevitable consequence of growth exceeding predictions. This is because the necessary tightening of monetary policy is too little, too late.

We join the family and friends of Australian cricketer Phillip Hughes with profound sorrow for his untimely and freakish death. Cancellation or postponement of cricket competitions everywhere is appropriate and it remains to be seen if anyone has the appetite for an early renewal of gladiatorial test match cricket.

Political economy

The price of iron ore continues to plummet, greatly worsening prospects for the Federal government's budget, growth of jobs in an already weak jobs market and indeed the overall national well-being. The simple truth is that every Australian must get used to making do with less, and the faster this happens the better it will be for all of us. If remedial action is delayed now the eventual, unavoidable remediation will be far more painful.

The journos say the past week has been the worst week for the Abbott government.

Master Chronicler, Paul Kelly says today: 'THIS week the accumulating defects of the Abbott government were on graphic display — excessive centralisation around the Prime Minister’s office, lack of proper consultation, flawed judgments and uncertainty about how to address its tactical dilemmas'.

Phillip Coorey in the Weekend Fin says the government is 'All at sea'. It contains a snippet that accurately reflects the views of bizoids known to Henry: 'One executive, still in Canberra after the dinner, complained that asking business for help was all well and good, but it had to cut both ways.

“He wants us to help him and he won’t tell us anything," said the executive, who had grown increasingly frustrated dealing with the government and with its performance.

'Others are complaining about lack of access and not being listened too'.

Outgoing Treasury Secretary, Martin Parkinson makes his best speech in the role. 'Outgoing Treasury Secretary Martin Parkinson, said the AFR, 'slammed corporate leaders, state governments and other ‘vested interests’ for seeking lower taxes or more revenues at the expense of ordinary citizens'.

Warnings there have been aplenty, eg early this year, and as recently as Thursday this week (see below). But it is surely time to shed the overoptimism of the past two decades and face reality. It's cold, hard and above all strongly competitive out there in the wider world. Only a people fully on the case and properly alive to reality will prosper in that world.

Best of the Blogs, 2014

'Gor blimy comrades', 20 May 2014

'Who'd of guessed it? Tony Abbott has taken the axe to every program he can find, even adding to the taxes paid by his rich Liberal mates. He's hit us battlers harder, of course, and the brothers at the local pub have all agreed to vote for Bill Shorten or Clive Palmer. Gary Morgan says the Libs are buggered, and even the Oz says Abbott and his mates are in their own world of pain. Dunno why, as all they're sufferin' is a wage freeze plus less free plane trips when they quit politics. Which looks like commin' sooner than they thought. Even the useless bloody State Premiers are whinging, and most of them are Liberals'.

Henry's roving reporter filed this missive from a battleground of the class war, the front bar of Balmain's most traditional pub.

'What I love about Melbourne and Melburnians', reports Fiona Prior, 'is their continual, surprising innovation and open-mindedness. Sydney is still to get the laneway dining-thing right though we have been attempting to for well over five years now, while Melbourne’s outdoor dining never ceases to delight. Walk into a somewhat excessive exhibition of a famous designer in Melbourne that is at times overtly sexy, confronting, and provocative by virtually any definition, and you will see ladies who lunch, art students, girls and boys who love clothes, design junkies of all ages, silver haired couples with walking sticks, school children on excursion, and variously sized and styled little ones accompanying their parents … How wonderful!'

The RBA's deputy Chief, Dr Philip Lowe, in a recent address at the Australian Business Economists (ABE) Annual Dinner, made some important points about the structural aspects of Australia's economy, in his boss's great 'glass half full' tradition. In accord with that tradition, the points where Australia is not performing well were down-played or ignored.

In the interests of objectivity I shall summarise Dr Lowe's cheering points and then list some issues where, prudence (or lack of gritty front-line experience), has lead Dr Lowe to an overall assesment that is too optimistic.

First let me endorse without reservation Dr Lowe's tribute to a great Australian, MJ (John) Phillips, a colleague with whom this writer worked in great harmony during the 1980s.

Dr Lowe: 'I would like to pay tribute to one of my predecessors who passed away earlier this month – and that, of course, is John Phillips. John served the Reserve Bank of Australia (RBA) (and before that the Commonwealth Bank) for more than four decades, and between 1987 and 1992 sat in the office that I now occupy. John epitomised the first of the RBA's core values – that of serving the public interest. He did this with great dedication during his time at the RBA and in his highly distinguished subsequent career. At the RBA, John worked tirelessly to modernise Australia's financial and monetary system, and to modernise the RBA itself. The institution that I now serve, as well as the broader Australian community, owe him a considerable debt. John will be sorely missed'.

Dr Lowe's obiter dicta - quotes are from Dr Lowe's speech.

Uncertainty is a fact of life, and 'it is important that we guard against the possibility that this uncertainty mutates into chronic pessimism – that is, for it to become normal for us to think that our prospects are limited'.

'The Australian economy does have the foundations for a successful and prosperous future, ... and how well we take advantage of those foundations depends increasingly on investment not in physical capital, but in human capital'.

The sort of economy we should be aspiring to includes: 'a national currency with sustainably high purchasing power; sustainably high real wages; and sustainably high real returns on capital. High purchasing power and high wages mean that for each hour that we work we are able to buy more goods and services. And high returns mean that savers get rewarded when they take a risk or defer their spending and save for the future'.

To these points one can only offer a hearty 'hear, hear!'

Dr Lowe's bull points

'Exports to Asia are up by around 30 per cent over the past five years. Our three largest export destinations – China, Japan and South Korea – are all in the Asian region and free trade agreements have been concluded with each of them recently'.

'... around 8 per cent of the Australian population was born in east and south-east Asia or India. This is up from less than 1 per cent of the population around the time that I was born. In comparison, in the United States, only around 3½ per cent of the population was born in Asia and for most European countries the figure is below 2 per cent'.

'There are also large numbers of students from Asia studying in Australia. ... All up, there are more than a quarter of a million Asian students studying here. In time, these students will add to the already vast network of our alumni across the region'.

'The strong people-to-people linkages can also be seen in the broader data on international short-term arrivals. At the moment, more than 250,000 citizens from Asia are travelling to Australia every month, with arrivals from China reaching nearly 80,000 a month'.

'Over the past decade, Australia has had almost the fastest rate of population growth in the OECD and this is expected to continue for some time to come'.

Australia has a 'considerable endowment of natural resources, both in terms of minerals and agricultural land. ... For many years, revenue from resource exports was equivalent to around 5 to 7 per cent of GDP, but recently it has averaged double this, at around 12 per cent of GDP. With a large increase in LNG exports still to take place it is possible that this ratio will increase even further, although this will also depend on how the prices of our exports evolve'.

' ... the jobs have been created over the past couple of decades ... [include] the fact that the largest increase has been in jobs with higher level qualifications. [Also] in terms of industries, the bulk of the new jobs have been in services, with over 3½ million service industry jobs having been created since the early 1990s. These jobs are in health, education, personal services, retailing, finance, engineering, information technology, software design, telecommunications – the list goes on'.

I acknowledge Dr Lowe's comments about general matters required to be done as well as possible in the fast-moving, dynamic modern global economy. He would like to see a more entrepreneurial business culture, an 'appropriate mix' of sophisticated skills to produce premium goods and services and the need to find ways of 'deepening collaboration between our universities and businesses'.

Again, these aspirations all deserve a hearty 'hear, hear!'

The bear points.

The national mood is gloomy, and expectations of Australians have not yet adjusted to the post GFC, post mining boom reality.

The currency is still too high, but 'the RBA has been saying for a while now that a lower value of the Australian dollar would be helpful from an overall macroeconomic perspective'. But what has been done to create that more competitive currency?

Australia's cost structures are too high, but 'concerns about the overall level of wages in Australia are, to some extent, really concerns about the exchange rate, with the high exchange rate leading to high wages expressed in foreign currency terms. A lower exchange rate would obviously make a difference to these comparisons'. But, again, what is the plan for a lower currency? In addition, the excessive currency is certainly not the only obstacle to success. Surely Dr Lowe does not believe the regulatory framework for labor and other markets in Australia are optimal? What about coastal shipping Dr Lowe?

The debt and deficit position of the Australian government is parlous, arguably out-of-control. Any ideas about this, Dr Lowe?

The political atmosphere is poisonous, and one might assert that 'disunity is death' in football teams and other matters of great importance.

One understands that a central banker concerned to reach the ultimate step on the career ladder must be prudent, but one hopes Dr Lowe at least expresses strong views about these blockages and obstacles in the privacy of his discussions with Australia's Treasurer.

It might be noted that John Phillips was blocked from the ultimate step in his central banking career, as was this writer, and largely for the same reason - excessive frankness in giving advice.

Philip Lowe's speech should be read by all Australians interested in a better future for themselves and their children and their children's children.

But it must be read with a critical eye and a willingness to fill in the blanks.

Time for national belt-tighting
Date: Tuesday, November 25, 2014
Author: Henry Thornton

China's economy is slowing and demand for coal and iron ore is falling. Both sources of Australia's extreme boost to national wealth in the past several decades are drying up. Yet our national cost structure remains at the exaggerated levels that occurred while we were riding in the ore truck's massive carrying space. See the successive Raff Reports, or the prophecies of Louis Hissink.

Messrs Raff and Hissink were early to report the massive squeeze on small mining companies. Now we are told that BHP Billiton and Rio (and presumably other global mining companies) are undergoing rigorous cost cutting and that the era of growth by acquisition is over. Henry heard this on ABC radio this morning, along with frequent denunciation of the government's 'broken promise' not to cut the budget of the ABC and SBS. Typically, SBS seems to have copped its share in restoring national prosperity far better than the mighty ABC. But I digress.

The most exciting point made by BHP's CEO, Andrew MacKenzie, was the plan to crank up output from the great Olympic Dam mine, first developed by Western Mining Corporation. Henry recalls with great clarity WMC's Managing Director, Hugh Morgan, telling the board of the RBA just how much time and effort was needed to get permission to begin building that mine. One assumes companies are still being strangled by red tape, despite Josh Frydenberg's valient afforts.

The Oz reports: 'BHP Billiton has outlined new plans to turn the Olympic Dam mine in South Australia into the world’s second-biggest copper mine and potentially the world’s biggest uranium mine, in a big-ticket expansion that could see extra production at the start of next decade'.

But the full interview, introduced by Radio National's Fran Kelly this morning, will repay careful attention. If Australia's global mining leader is cutting costs, and raising productivity, everyone else should do so also, or soon will be.

Is is way past time to tighten national and individual belts, gentle readers. But it is better late than never, so it is time to listen up and act.

'THE pivotal plays in Tony Abbott’s foreign policy' writes Paul Kelly, 'are with the big Asian powers — China, Japan and India — and not the US, despite Abbott’s pro-US disposition, commitment to Iraq and his effective working ties with President Barack Obama.

'This trend, apparent for some time, was unmistakable this week. Abbott is laying new foundations for our Asian future likely to last for decades. While Australia enjoys a fully developed relationship with the US, there is greater untapped potential in emerging arrangements with China and India and still fresh opportunity with Japan.

'Abbott grasps this and acts on an ancient law of politics — search for the big new breakthroughs. This is Abbott’s instinct and vision. He is not a leader for sophisticated strategic concepts. He is, instead, a man of action who believes in the power of personal relationships, picks the opportunities and has no truck for academic theorising about the contradictions in what he does'.

The waves from the G20 meeting, Andrew Robb's third Free Trade agreement, with the promise of another, and President Obama's shirtfront on climate policy continue to reverberate. Messrs Abbott and Hockey urgently need to find a way to fix the budget without a whole series of unpopular policies that (even collectively) are unlikely to put the budget into surplus in the foreseeable future.

I remain of the view that the GST, as part of reform of the Federation - removing 'double dipping' administrations - is the best answer. Surely the states could be brought to agree, especially as the reforms would take us back toward the vision of the founding fathers. In fact, a force of one Federal Minister and one senior minister from each state government and a team of sherpas from all areas of government could be tasked to produce a White Paper on the savings from a proper federation, with Defence, International Trade and other obviously national matters run from the centre and all other matters run by the State and Territory governments.

It might turn out that thorough-going abolition of administrative 'double dipping' might do most of the budgetary heavy lifting, and the GST could stay more or less as it is at present.

Just a thought, Tony.

Kulture

Very sad to read about the supposed 'Twilight of an art movement'.

Nicholas Rothwell writes: '“END of an Era,” proclaimed the staccato media statement sent out earlier this month by Melbourne’s Gallery Gabrielle Pizzi, long the starriest and best-known name on the commercial Aboriginal art scene — and for once the hype was right.

'The closure of the gallery after three decades serves as dramatic confirmation that the high-end market for traditional indigenous art has all but evaporated'.

Read on here, gentle readers, and mourn. But the great Aussie tradition of outback images will be back, dear readers.

Player trading has more or less finished in the AFL and Caaaarlton! seem to have flown under the radar. Read the SunHerald article at a coffee shop this week that claimed the Blues have quietly picked uo a number of grown-up players, some of whom may become good regular players, while there are stars in the making among the survivers of the culling by Mick the Merciless. Time will tell.

The young guns have carried Australian one day cricket to a series win over South Efrica, and one more win will restore us to number one. When in doubt, or desperate, always go for yoof is Henry's views about international sport. Curiously, however, he sees the wisdom of old age as the ideal for business or politics.

The futball (soccer) team had a great first half against Japan but relaxed slightly in the second half, with Tim Cahill's goal helping provide respectability to the 2:1 scoreline. As the press has said, several other potential goal scorers have to become more confident and learn how to score like young Tim.

The Wallabies tackle the Irish in the wee hours tomorrow, and can expect a tough encounter. With Mr Beale on the bench, we may be able to give the Irish a touch of the X-factor. But I will not hold my breath, or get up to watch. There have been too many disappointments.

Am coming to that view about the Outsiders, but will watch again tomorrow to see if the cartoon spot (easily the best part) uses the gem below. Will anyone give me good odds?

'Without doubt this is the toughest market for the resource sector that the Raff can remember, since graduating from Macquarie University in 1975. Murdoch’s paper is too long to detail in a Raff Report but his key findings were as expected. Here are just a few points from Murdoch to ponder:

1. The Metals and Mining Index has hugely underperformed BHP (this reflects the dumping of junior metal miners and explorers and the relative safety of BHP which at least pays a dividend).

2. Only 28% of companies have the cash typically needed to mount a robust site programme that may result in a re-rating of the company’s share price (to give readers an idea of drilling cost, a ballpark figure for a drill rig with capability of 1,000 metres capacity is $6,000 per day; for this you might get 90-120 metres open hole or 30 metres of diamond core).

3. 22% of explorers do not have the cash to do any real work on site (the Raff looked at a bunch of Appendix 5Bs recently and one characteristic in common was cash outflow for administration dwarfing expenditures on exploration).

4. On average, energy explorers spent $740,000 on exploration, nearly three times the expenditure of companies exploring for precious and base metals (the Raff thinks the recent hike in the price for uranium will see a swing back to exploration for uranium in 2015, and energy explorers, on average, will outspend precious and base metals in 2015).

The latest Raff Report explains the dire straits our small mining companies find themselves in, a theme first predicted here by Louis Hissink at least 18 months ago. And Louis weighs in with his own current thoughts on the dire straits of the mining industry.

Here is a BHP Billiton perspective. 'BHP Billiton, the world’s largest miner, is not concerned with the five-year-low iron ore price, saying its West Australian operations are still making a good margin, as it defends its expansion strategy in an oversupplied market'.

G20 triumph

We have, however, noted the new Free Trade Agreement and the visits of the G20 leaders and Finance ministers. Both events are positive, but only the new FTA goes beyond nice theory. Politics, as so often happens, is likely to block economic policy, as we observe so painfully here.

Overall, a triumph for Tony Abbott and Joe Hockey, and now we know how to boost global growth; but we also know this will only happen if the policies listed by the G20 nations are implemented, and we can see just how many have got through Australia's Senate. This may well be the usual response, leaving the G20 growth boost nice theory, disappointing practice.

How ironic that the Chinese president Xi Jinping spoke so graciously about China's new partner Australia in the parliament while Barak Obama seemed to undermine our policy on climate change at the University of Queensland. Noone has explained yet how China's and America's climate change policies are different to ours, and how we achieved a better performance on CO2 emissions than the mighty USA.

What a thrill, the leaders of G20 nations arriving in Brisbane, our new 'global city'. The Agenda for their meeting is largely economic, with the Australia-China free trade deal (Step 1) to be announced Monday to provide an exclamation mark. US-China climate change deal puts a big 'Stop Press' sign as a preamble, and it is also good to see the amount of press activity devoted to international tax avoidance. Why discuss tax hikes here when Google, Amazon and IKEA, and other multinational are playing us for mugs?

The most interesting item in the weekend press, for this writer at least, is Stirling Larkin's 'Steps to avoid a banana republic'. Here are some quotes:* The RBA's 'money zero maturity' (whatever this is) has 'placed us in the unenviable position of drifting away from the commodities super-cycle and towards the abyss of ... a banana republic'.* '... real growth comes from technological developments, human ingenuity and the boosting of productivity through innovation, all of which are precepts of free markets and not the state'.* Australian Industry group Chief Executive Innes Willox believes "the Australian economy is changing gears and big parts are in the slow lane with little prospect for a quick turnaround'.* 'Willox highlights the need for the Australian economy to be retooled and rebooted to deal with the effects of a high-cost, high-wage economy saddled with a relatively high currency, struggling with the resources boom tapering off, construction struggling to gain traction, traditional manufacturing under pressure and slowing government hitting the services sector'.* "Like any good business, Australia needs to focus on its competitive strengths, intellectual capital and skills base to value add in resources, agriculture and manufacturing to give us the balanced sustainable economy with a distinctive competitive edge" Willox added.

The whole article is well worth reading. Mr Larkin's focus is one the investment practices of ultra-high-net-worth -families, who have for several years putting a lot of money offshore. The conclusion of the article links the economic reform program outlined by Innex Willox with a shift back toward investment in Australia.

Will our economy be saved by the G20? Andrew Robb says says China free trade agreement could ‘set us up for years’, reports Paul Kelly.

If the 2 % hike in global growth really happens, and if the free trade agreement with China happens as advertised, these developments will undoubtedly help. But to take maximum advantage the domestic reforms outlined by Innox Willox are needed. My fingers are crossed.

Footy'n'cricket'n'stuff

ASADA is said to have finally issued 'show cause' notices to 34 former and current Essendon players. Stephen Dank is still smirking for the press, and looks like escaping from penalty for his alleged part in the supplements saga. This issue is becoming a bigger 'clusterf**k by the week, and can only end badly for the AFL.

Meanwhile, Australian 'Futball' goes from strength to strength with its advantages if being a global game far friendlier to children, and therefore modern parents. Henry recalls at age 15 being given a shot of whisky before going out to play the hard men of Scorsby in an EDFL grand final. Nunawading played an honorable but losing game, and the young Henry was delighted no-one was killed or crippled.

Mitch Johnson is cricketer of the year for the second time, still scaring the cr*p out of batsmen and cheering local audiences. Pakistan was a catastrophe, the One Day series against South Efrica has started well, and the test series against India looms.

Kulture

Fiona Prior survived Java and now reports from, no, not from that comet but from a cinema showing the film called 'Interstellar'. Interstellar 'is a grandly enjoyable movie'.

Henry's sources reveal that a number of excellent movies will hit the screens this summer, so readers can find entertainment plus refuge from the heat if the cricket is boring.

Big international companies evading tax. Who'd have thunk it? The BCA opposed to fixing this. Well, what a surprise! Clearly there neeeds to be some international accord that companies will play fair on tax or be outed, or worse. What happens after outing remains to be seen, but individuals can make their views known in the most obvious of ways - stop buying their stuff.

Free trade agreement with China looking likely. Chalk this up as another bold move by the Abbott government, and will provide much opportunity to farmers and agriculturists. And it is a very welcome move strategically, which could be compared with pre-world war II decision by western powers to starve Japan of raw materials.

Jobs growth about half growth of the workforce, leading to inexorable increase in unemployment, loss of productive workers (dropping out of the workforce) and further upward pressure on welfare payments. Who cares? The government must and anyone else concerned at growing inequality should.

Imposing a modest real wage hike on the defence forces and others on the national payroll. In reality, if Australians all took a 20 % cut in money wages, our economy would be competitive again and our jobs growth would surge. Who cares? The government does and anyone else concerned at growing inequality should.

The exchange rate sinking, not yet quite like a stone, but that could be the next issue people worry about, or take advantage of by moving assets offshore and generally tightening their belts. Provided wage costs are contained - see previous comment - a lower exchange rate will help restore competitiveness. A lower exchange rate is a graphic signal of our nation giving up the fruits of the mining boom, reality bites. Ergo, we are poorer and can afford less welfare and lower incomes generally.

Points like these should be part of the Australian 'hymnbook'. Henry has been working to see that a 'hymnbook' is agreed by all participants in two significent industrial ventures. That is difficult enough for one enterprise, imagine the challenge for the Prime minister? Even the cabinet is said to be in need of more solidarity.

Hope these notes might be useful at festive season bbqs. Spread the news, folks. Global economic competition is ruthless, and Australia's current lack of competitiveness will impose costs on us all. As dear old Frank Cream said way back when: 'One man's wage rise is another man's job loss'.

We wish the Prime minister, his ministers and every one battling to improve Australia's competitiveness, thereby allowing more compassion, all their best with their endeavours, so look out boys and lady, disunity is death. This is why we need a compelling national 'narrative'.

Here is the latest RBA prognosis - their glasses now well below half full - indeed 'grim' as one newspaper summarised.

Do not panic, gentle readers - the G20 (sans shirtfronts) will sort it all out. Is it 2 % of GDP or 2 % pa Growth of GDP that is being added? Henry suspects we are all equally confused about this but either outcome will be welcome.

Footy'n'cricket'n'stuff.

Our recently victorious cricket team has been given a salutory lesson in the duust of the Middle East. Overnight it drew level in a T20 contest, whatever that is. Bring back the five day tests meandering to a meaningless draw is Henry's views. 'G20' is apparently the economy's version od T20, Henry has been told. Helter skelter for a short time, then its on to the next talkfest. One assumes it is better than fighting.

Rugby team started well under its new coach but faces severe tests in Europe.

No news of footy, except the non-news that ASADA has again failed to pounce. Obviously Asada feels its case is not sufficiently backed by evidence, and surely someone should insist there be an end to this farce. And it was good to read this week that Caaaaaarlton! believes is has recruited wisely. Time will tell.

So sad to see two horse died after the running of the Melbourne Cup. Not much to be done about it except, perhaps, to enforce rules apparently in place about use of the whip.

Terry Maher has again presented all the news that's worth reading in his views of the Spring Carnival.

Inequality in Australia is rising, but only gradually from not-too-obscene levels. This is one of the conclusions as Adam Creighton continues to fan the blaze after his boss Rupert Murdoch lit the flames in a major presentation to G20 finance ministers. Henry has been trying to get a copy of the presentation so he can check it for himself, but so far, no luck. Anyway, inequality has risen far faster elsewhere and it is plausibly due in part to the massive monetary expansionary that is 'Quanitative Easing' (QE). Do not miss the nice video featuring Alan Kohler.

Another economist has joined the discussion. Henry Ergas sees QE as dangerous and must be welcomed to the 'old ratbag club' (orc) otherwise known as the 'economic elite'. As clear evidence of his status, Mr Ergas quotes Keynes and Milton Friedman: 'While very sparingly used until then, that approach had a long pedigree. Before he turned to government spending as his instrument of choice, John Maynard Keynes had proposed QE as a key element in responding to the ­Depression. Mr Ergas speaks here. (Apologies if the link is not working, gentle readers, The Oz has done something different.)

“We cannot hope,” Keynes wrote in 1930, “for a complete or lasting recovery until there has been a very great fall in the long-term rate of interest throughout the world.” The problem, however, was that left to its own devices, achieving that fall was likely to prove “a long and a tedious process”. The answer was for central banks to “reduce the rate of interest to a very low figure”, while buying “long-dated securities either against an expansion of central bank money or against the sale of short-dated securities until the short-term market is saturated”.

'The Fed did just that two years later, with Milton Friedman, in the monumental monetary history of the US he co-authored with Anna Schwartz, crediting the policy with an important role in stabilising the American economy'. And, in conclusion, governments, and presumably, central banks, should be cautious, 'all too often, however, they have failed to heed Friedman’s admonition against “assigning to monetary policy a larger role than it can ­perform, asking it to achieve tasks it cannot achieve, and, as a result, preventing it from making the contribution it is capable of ­making”. Or, as Friedman used say more pithily: 'Monetary policy cannot serve two masters'.

To return to Mr Ergas; 'the “unconventional” measures the Fed is bringing to an end may become an object lesson in the costs ignoring that warning can impose'. More here.

I have not been to Indonesia for almost a decade ... definitely not since the Bali bombings and I was looking forward to discovering Java, an island I knew very little about except that it housed an ancient Buddhist temple of which my school art teacher had enthusiastically spoken.

Transporter God Garuda

A whiff of a clove cigarette at Denpasar airport accompanied the transition to my Yogyakarta flight. On arrival I sadly noted the rituals of post-terrorism Indonesia, as each time my driver pulled up at our hotel or any major public/tourist destination a long stick with a mirror attached to its end was walked round the car to detect attached explosives.

What a catastrophe. On a dead pitch, even Mitch Johnson can't put a batter, or preferable two, out of the game. The formerly hapless Pakistani team is putting Australia to the sword. After scoring almost 600 for 6, the Pakistanis declared and snared the wicket of nightwatchman Nathan Lyon. Personally, I blame australia's mothers. Don (Bradman), Jeff (Thompson), Dennis (Lillee), Ricky (Ponting), the list of good old aussie scrappers goes on. 'Nathan, move a few inches to the left, if you don't mind', is unlikely to scare the batter as much as 'Rip into the bas**rd, your b**tard', once would have unsettled the nice lads from Karachi.

Shane (Warne) set the new trend of Superstars with, in his case, only slightly sus first name. But 'Nathan'? Mrs Lyon has a lot to answer for, as do Mothers who call their kids Trent, Jeremy, Fortesque, ... and other 'modern' names. Fill in your favourite first name.

In Footy, ASADA is still poised to pounce, but seem to lack the guts, or evidence, to do so. Here is a modest suggestion. The Napthine government should pass a law, or promulgate a regulation, that asserts if ASADA fails to pounce by November 1 its all over. Oooops, I meant November 4, by which time every one will be focussed on the Cup. While they are at it, Mr Nahthine might ban foreign horses from The Cup. Either new policy would put the state Libs back in the election race. Both would make an election win a dead cert.

Rupert Murdoch has greatly contributed to the debate on the world's currently uncontrollable asset inflation. In a recent speech to the G20 finance ministers, he blamed asset inflation on money printing in the guise of 'quantitative easing'. He noted, according to Paul Kelly's report in The Australian, that this was the cause of widespread asset inflation. Most importantly, he noted that the net effect of this was to make rich people much richer, and therefore made income disparity far greater.

This is a consequence of overly easy money that is vital for the stability of modern capitalism. Zero interest rates and massive 'quantitative easing' has greatly inflated asset prices. This has made rich people richer, and has little benefit for ordinary people. The great thinkers, including Keynes and Marx, have seen excessive inequality as likely to damage, even destroy, capitalism. So, even without factoring in the likely (serious) economic consequences of withdrawing excessive monetary stimulus, there is a serious issue awaiting resolution.

This is an issue that should provoke widespread interest in the question about the causes and consequences of asset inflation that is not generally even debated in academic circles.(Macoeconomics is a largely overlooked subject in academic circles, being too hard for most economists.) However, Mr Murdoch's speech is likely to have wide ramifications in the real world.

Today The Australian has continued the debate, courtesy Adam Creighton, who asserts that 'Economic elite back Rupert Murdoch’s inequality fears'. Henry acknowledges his editor's appearance in Adam's list of local economic gurus but believes concern at growing inequality within the rich nations is, or should be, a concern to economic thinkers everywhere. For the academic end of this debate, you need go no further than the much discussed work of Thomas Piketty.

But now for Adam's contribution: 'VETERAN Reserve Bank economist Peter Jonson cheered yesterday when he read Rupert Murdoch had warned G20 ¬finance ministers that money printing by central banks had exacerbated inequality and fanned discontent with the global economic system.

'Mr Jonson, a Reserve Bank economist for 16 years and the former Henry Thornton columnist for The Australian, said he had been worried for years that so-called quantitative easing (QE) had benefited the rich by artificially boosting share and property prices. {NB - two typos corrected.}

' “Mr Murdoch has made the absolutely valid point that QE has done really nothing or very little for ordinary people,” said Mr Jonson, the bank’s head of research for seven years in the 1980s'. ...

'Bob Gregory, professor of economics at ANU and a former Reserve Bank board member, said Mr Murdoch was “completely right: QE is causing rising asset prices and growing inequality, but the harder question is what should central banks do now, and what should they have done then after the financial crisis”.

' “The intellectual underpinning of QE is a kind of ‘trickle down’ economics whereby the rich feel richer and spend more,” he said, suggesting the policies would eventually stoke inflation in consumer prices as well as asset prices'.

The answer to Bob Gregory’s question – what to do about it – is that we never should have gotten into the situation we are in.

Having got there, we must take our medicine. Ending QE will presumably remove some of the excess asset fiz, and raising interest rates will remove some more.

If the beneficiaries of the great asset boom are lucky, they will end up net net better than they would have been but not nearly so rich as they are now. (If the smart, or merely lucky, ones bail out at the right time, they will remain rich.)

This will be what it will be. The real lesson to not let it happen again. That's where macroprudential policies fit in.

But I am reminded of a comment John Howard once made: ‘No-one complains to me that the price of his house has gone up’.

Continuing with Adam Creighton: 'A new study by the US-based National Bureau of Economic Research written by eminent tax economist Emmanuel Saez, released on Monday, found the rise in wealth inequality in the US is “almost entirely due to the rise of the top 0.1 per cent wealth share”, noting that share had grown from 7 per cent in 1979 to 22 per cent in 2012 — a level almost as high as in 1929. “The bottom 90 per cent wealth share first increased up to the mid-1980s and then steadily declined.

' “The increase in wealth concentration is due to the surge of top incomes,” the authors said' . ...

'Joe Hockey agreed that “loose monetary policy has helped people who own a lot of assets to become richer, and that is why loose monetary policy needs to be reversed over time and will get back to normal levels of monetary policy.”

Alan Kohler has also weighed in with some analysis of the history of inequality. His headline is 'Roots of imbalance sown in the Reagan era', and he asks 'Are we seeing a return to the time when middle classes didn't exist?'

Henry is keen to foster debate on this vital issue. If you wish to contribute, contact Henry here.

There are some welcome developments in economic management. The Prime minister has put Commonwealth-State relations on the agenda, which has widely been interpreted as implying a broadening and/or widening of the GST. As Mr Abbott said, the real issue is deciding which level of government does what and cutting out the overlaps, double guessing and double regulating.

This will save money but, if done thoroughly, there would be wider benefits. Shared responsibility is no responsibility, and allowing states to have sole control over specified functions would make for far clearer lines of responsibility. There would also be opportunity for states to offer competition. For example, a particular state might opt for more technical training and less production of excess lawyers, economists and experts in gender studies.

Another good sign is that labor costs are now growing more slowly than for a long time. Provided this can be maintained as the currency devalues, it might make a useful contribution to making Australian industry more internationally competitive. There is also the project of killing unnecessary regulation, and if we can get really serious about this, it will also be helpful. I worry that our international competitiveness is so compromised that best realistic endeavours shall not be enough, but I hope I am wrong. Failure to boost competitiveness strongly is the biggest risk facing our economic well being.

The second biggest risk is failure to fix the budget. I think Labor would be sensible to stop playing doggie in the manger and say they oppose various budgetary measures but they will wave them through so that the budget can be fixed. If the side effects are excessively horrific, or if the budget is not fixed, one would expect the government's popularity to plunge. Ergo, Labor reelected with a reputation for allowing the voters to have their say.

A third risk, far harder to deal with, is rising inequality. This has been greatly exacerbated by the super-easy monetary policy since the GFC. Many great thinkers, including Keynes and Marx, have seen excessive inequality as putting capitalism at risk. Rupert Murdoch has put this issue squarely on the global agenda with a speech at a meeting of G20 Finance ministers. How leaders respond will be vital, but even removing excessive monetary policy ease will be a major challenge to the stability of the global economy.

The next biggest risk to Australia's prosperity concerns the state of the world economy. As Larry Summers has concluded, high growth, especially in authoritarian nations, can and usually does end badly with a return to global average growth. A dramatic slowdown in China and/or India would hit hard a world economy that is already struggling to recover from the severe recession induced by the GFC. There is another iron law of economics, which is that nations with large debts, private plus public, take a long time to recover. Think Japan after its asset bust in 1989/90. And this was the first 'miracle economy' of the modern era.

Some will say Australia was also a 'miracle economy', and so it seemed at the time. With current policies, Australia is adding a mountain of government to debt to everests of household debt and company debt. This comes at a time when our cost structures are out of whack and there are growing doubts about the likely strength of global growth, and some chance that the Chindia boom will slow severely, even if there is no bust to follow the boom.

What would you do if your household had built a debt mountain and priced itself out of the market, gentle readers?